Educational Articles

Dow-30 Earnings: Wal-Mart Stores - Fiscal First Quarter 2013

Kevin Downing
| May 16, 2013

The world's largest retailer, Wal-Mart Stores (WMT – Free Wal-Mart Stock Report), has reported April-quarter earnings per share of $1.14. The result reflects 4.6% year-over-year growth and was within management's guidance range of $1.11-$1.16, but below our $1.20 call. Companywide sales grew 1.8% on a constant currency basis and 1.0% including the impact of a stronger U.S. dollar.

Domestic same-store sales were somewhat disappointing. They fell 1.4% versus flat guidance, as traffic was down 1.8% and the average transaction amount only increased 40 basis points. Although customers eventually received their delayed tax refunds, they apparently did not use the same percentage of them to purchase discretionary goods as in the past. A 2% payroll tax increase and an abnormally cold spring season across much of the United States also hindered results. All told, investors were not impressed with the company's financials and bid the stock modestly lower in response.

The retailer was able to lower expenses by 1.3%, owing to better logistics and less incentive pay. Wal-Mart expects to leverage expenses for the full year and remains on track to achieve its goal of lowering operating costs 100 basis points from 2012-2017. Areas of focus include self-checkout expansion, higher direct import volumes, and more streamlined transportation.

Taking a look at individual product categories, the grocery segment posted a low-single-digit comp, as inflation was benign. Notably, WMT made some adjustments to how it stocks produce, which reportedly has been resonating with customers. The consumables business benefited from lower prices. Health and wellness delivered a low-single-digit negative comp due to the transition from brand name drugs to generic varieties. This was offset by strength in over-the-counter medicines and goods. The aforementioned weather conditions took a toll on the outdoor living, sporting goods, and apparel categories, though we expect improvement in the current quarter. Entertainment sales fell in the mid-single digits, as reduced discretionary spending took a toll. On the bright side, cell phone and tablet sales continued to be vibrant. Indeed, market research firm NDP group reported that Wal-Mart became the number one handset retailer in terms of volumes during the first quarter.

Importantly, management stated that stocker productivity improved, as cases handled per worker rose 3%. This was due to the implementation of new assignment tools (MyGuide and OneTouch).

Sales from the international unit were up 5.4% in constant currency terms and 2.9% on a reported basis, versus a 15% improvement in the year-earlier quarter. Expense controls were disappointing due to wage inflation and strategic investments. The company revealed that it takes more time to implement productivity enhancements overseas. We expect these challenges to remain a factor in the current quarter before showing improvement in the second half of the fiscal year (ends January 31, 2014).

Sam's club performed largely as expected. A 20 basis point comp gain was within the guidance range, and operating profits rose 7%. Traffic was up 1.3% while the average ticket fell 1.1%, as business members remain under pressure due to weakness in the small business economy. The company announced $5 and $10 increases to its Advantage and Business membership fees, respectively. Both now stand at $45, while Plus members still pay $100 a year. This was the first price hike since 2006. We doubt the increase will hurt renewal rates, as this was not the case at similar warehouse chains Costco (COST) and PriceSmart (PSMT) when they increased fees. The hike will take effect depending on what time of year members have to renew, so the positive impact should be felt for the next 24 months. Looking forward, Wal-Mart is calling for a 1%-3% comparable-store sales gain for Sam's in the current quarter.

Store expansion remains high on management's to-do list, and the company is on track to reach its goal of 15 million to 17 million in square footage expansion this year. Small format Neighborhood Markets are the priority and have been performing well. Wal-Mart Express is also testing well, and its comp gains continue to be in the double-digit range.

Weather should be less of a factor in the current quarter, but we are somewhat skeptical that Wal-Mart's relatively less affluent customer base will increase its spending in the July interim, barring a marked improvement in economic conditions. In response to recent results, we have lowered our July-quarter earnings-per-share estimate by a nickel, to $1.25, which is in line with guidance of $1.22-$1.27. Meantime, our full-year fiscal 2013 earnings call moves down to $5.30, from $5.40.

About The Company:Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,158 supercenters (includes sizable grocery departments), 561 discount stores, 620 Sam’s Clubs, and 286 Neighborhood Markets in the U.S., plus 6,148 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.072 billion (as of 1/31/13). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% U.S. sales in 2012, while sales per square foot were about $437.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.